Finance Your Own Business. Garrett Sutton

on all three of your major credit reports (at Equifax, Experian, and TransUnion), these cards may not report to all of the major agencies we will describe later.

      If you are confident in your ability to manage one of these accounts successfully, then hold on to those offers you receive and spend a little time comparing them. You can also get more information on credit card offers in our Resource Section. You can also use a website like Credit.com which compares offers for you. Just don’t apply for multiple cards at once. Each issuer will almost always run a credit check on your personal credit, and that will appear on your credit report as an inquiry. Recent inquiries can lower your credit score slightly, so only apply for one card at a time and make sure it’s one you really want.

      As long as you have decent personal credit scores, it’s usually not that hard to get one of these cards, even if your business is relatively new. You may have to settle for a smaller credit line or you may have to get a charge card that requires you to pay your balances in full each month, but most people will be able to qualify for one. When you do, you may find yourself in a good position to earn lucrative rewards for your business spending. Those may include airline miles or points toward travel or merchandise. The rewards on business cards are similar to those for premium personal credit cards. And as long as you pay in full each month to avoid interest, one of these cards can be an excellent deal.

      • Retail and gas cards are the easiest for businesses to get without a personal guarantee.

      • Major business credit cards (American Express, Discover, MasterCard, Visa) are more widely accepted, but usually require personal guarantees unless your business is well-established.

      • Again, do not fill out multiple card applications at once. Doing so can create multiple inquiries on your credit file, and a result in denial.

      • After you have had a business card for at least six months and have paid it on time, you may want to request a credit line increase.

      We will explore the additional steps for building business credit in Chapter 13. For now, let’s get a business loan…

Chapter 3

      Small Business Loans

      Starting a business can be exhilarating; a leap of faith into the unknown, if you will. Those words also describe what Aaron and Kathy Corr’s customers often experience when they visit TreeUmph!, a fourteen-acre elevated obstacle course in the treetops for adults and kids ages 7 and older. At TreeUmph!, the adventure includes wobbly bridges, tightropes, hanging nets, swinging ropes and, of course, ziplines. It opened in January, 2013 in Bradenton, Florida and the response from the community has been enthusiastic.

      But getting the business off the ground proved to be more difficult than the Corrs expected. Like many entrepreneurs, they tapped everything they could to get it started, including personal savings, personal loans, and funds from friends and family. “We’re fortunate to have a good strong team and good capitalization,” says Aaron. In fact, they thought they were good to go, but discovered that there were a lot of state, and municipal, and regulatory requirements that required additional funds.

      So they went looking for a small business loan. “We were very confident we could find the money we needed because we knew we had a good idea, a good business plan, and we were well-capitalized,” Aaron says. “But we had a bit of a rude awakening when we started going to banks looking for the additional funding we needed. We literally were refused at the door at the banks that we went to because they would not deal with startup businesses.”

      Finally they approached a community bank that was willing to listen to their plans.

      Shaun Merriman, president and CEO of Gateway Bank, says that two things set Aaron and his wife Kathy apart: their passion and their planning. “I could tell that this was something that they’d been working on a long time. It was one of the best designed business plans that I have ever seen in 28 years. Their plan was one of the most comprehensive, well-organized, and well thought through.” As a result, Gateway Bank was able to make the loan, and the Corr’s were able to launch a business that’s been garnering rave reviews.

      When it comes to borrowing from a bank, who knows better than a banker? For this section, Tom Trafficante, the Executive Vice President and Chief Credit Officer at Heritage Bank of Nevada, provides his thoughts.

      Before You Apply for Small Business Loan

      You know the saying, “You only get one chance to make a first impression?” That’s true in many aspects of business, including when you apply for a small business loan. Before making a formal application to a bank for a small business loan, be sure to research banks and other lending institutions which are actively making small business loans in your community and arrange a meeting with at least two of these lenders.

      There are multiple government and non-profit agencies in most communities to assist small businesses with planning and counseling, including assistance in preparing a business loan application. These include the U.S. Small Business Administration (SBA), Small Business Development Center, SCORE, Chamber of Commerce and Economic Development Agencies. By first contacting one of these agencies, you will be able to determine which banks are more aggressively seeking loans and obtain a referral to meet with them. You should also contact your own accountant, attorney, insurance broker or business associate for a similar reference.

      Once your list of banks is narrowed down to two or three, set up a meeting with each bank to discuss your individual situation with them. You should take the opportunity to better understand the bank’s procedures for processing and approving the type and size loan you are looking for.

      Factors Used by Banks to Evaluate Business Loans

      The application process

      The process used by a bank to evaluate small business loans varies considerably for each institution and is based on several factors. The size and complexity of loan request determines the depth and nature of the underwriting process. For smaller business loan requests (typically loan requests less than $100,000), most banks use a more streamlined approval process or automated underwriting process. Some banks utilize automated credit scoring systems for loan requests as high as $250,000.

      Credit scoring models are heavily reliant on the strength of the credit reports of both the business and the principal owners of the business who will be required to guarantee the loan. In addition to information obtained from credit reporting agencies, the automated system will use income and asset information from the applicant’s tax returns and from the application to underwrite the loan for sufficient cash flow and liquid assets.

      Most banks will require that they be able to review three years of operating history for the business and three years’ financial information from any principal owner with 20% or more ownership interest in order to obtain a commercial loan. Generally, for a business with less than two years of operating history, the business will be considered a “start-up” and generally will not qualify for a conventional loan with a bank. Only in cases where the principal owners have sources of income and strong cash balances to support the loan repayment without the business income, would they be considered by a bank for a start-up business loan. Some banks will consider a loan to a start-up business with an SBA guarantee, but even with the SBA guarantee (discussed in Chapter 4) most banks will not consider a start-up business for financing. If the loan request is declined by the automated system or when the loan request exceeds the threshold amount of $100,000, then the loan is processed with great detail and scrutiny.

      What is required to apply for a small business loan

      Typically, a small business loan request will require the following information:

      • The business tax returns for the most recent three year period

      • The personal tax returns of the all principal owners for the most recent three year period

      • The fiscal year end business financial statements for the most recent three year period

      • Interim financial statement (since the most recent fiscal year end)

      •